Have reforms changed India's corporate structure?

July 10, 2009 10:47 IST

The biggest change in the country's economic structure since India's reforms began in the early 1990s, most will tell you, is the increased role of India's corporate structure.

Indeed, in his Budget speech, Finance Minister Pranab Mukherjee has pointed out that the principal growth driver in the last five years has been investment by the private sector indeed, it is the dip in this that has triggered India's current slowdown.

The same picture of corporate dynamism can be seen when examining the country's top business houses.

With amazing regularity, there appears a new star on the horizon every so many years when is the last time you heard someone talk of the Modis or the Goenkas, for instance?

This is Schumpeterian creative destruction at its best. See the number of industries where foreign firms (think LG, Samsung, Suzuki) dominate, and the picture is complete.

Which is why a recent study by Laura Alfaro of the Harvard Business School and Anusha Chari of the University of North Carolina* is of great interest. The study uses corporate data for India from 1988 to 2007 to examine the level of transformation in the economy.

Not surprisingly, the study documents the increased size of firms, their increased profits and so on; what is disconcerting is the conclusion: Closer examination does not suggest a story of dramatic transformation following liberalisation, but rather one of an economy still dominated by the incumbents (state-owned firms and business groups).

Not true, you'd rush to point out. How do you explain Bharti, for instance? Or Infosys? Wipro? Or the fact that the most of the new infrastructure firms you can think of (GMR, GVK) are all somewhat new.

The authors agree with this and point out that the one exception to this appears to be the services sector the paper doesn't say this, but its likely that the entry barriers in the services sector may be lower and, perhaps, till recently, this was an area established business did not really focus on.

The paper that focusses on the evolution of India's industrial structure from 1988 to 2007 uses data from CMIE's Prowess database, and the firms it covers account for more than 70 per cent of the country's industrial output, 75 per cent of corporate taxes and more than 95

per cent of excise duties in other words, the sample is a pretty robust one.

It looks at the shares of incumbent groups, whether privately-owned or state-owned,

in terms of share of assets, share of turnover or even share of profit. Between 2001 and 2007, for instance, CMIE data reveals state-owned firms still accounted for 59 per cent of assets, 42 per cent of sales and 50 per cent of profits.

It also points out that there has been a huge rush of private firms while the number of state-owned firms rose from 662 in 1988-90 to 856 by 2001-07, the number of business group-affiliated firms rose from 2,041 to 4,935, the foreign ones from 540 to 1,035 and the total number of private firms rose from 8,153 to 15,063.

Despite

all this, however, the authors find that the incumbents remain the dominant ownership group even after liberalisation. The rates of return enjoyed by these groups, the authors also find, remain quite stable over time you'd expect a lot less stability in a competitive environment.

This is certainly something you'd expect the newly-empowered Competition Commission to look into carefully, since it would appear that just the possibility of a new entrant coming in doesn't help increase competition certainly the fact that firms can't really exit a sector easily would limit the number of entrants as well.

In the telecom sector, for instance, with a few exceptions, most tariff plans offered by companies aren't too different.

The authors conclude by asking a policy question: In the context of such high industry concentration, does privatisation simply mean replacing state-owned

monopolies with private ones as has happened in many cases in Latin America.

Politicians, to the extent they read, will use these findings as a reason to postpone privatisation. The larger question, however, is that the process of liberalisation has a long way to go. One reason for high and unchanging industry concentration has to do with the large role the state plays in continuing to make or mar an industrial group's future.